Italy cabinet meets amid division over pensions

ROME (Reuters) - Italian Prime Minister Silvio Berlusconi summoned his cabinet for an emergency meeting on Monday to seek ways to overcome opposition from coalition allies to demands from European partners for swift economic reforms.

Following explicit calls for action at the weekend from German Chancellor Angela Merkel and French President Nicolas Sarkozy, Berlusconi is due to propose reforms to the pension system that have so far been resisted by his allies in the Northern League.

Monday, parliamentary group leader Marco Reguzzoni repeated that the League was firmly against pension reforms, including raising the retirement age to 67 from 65, a step urged by institutions including the Bank of Italy.

“The League has always been against any pension reforms,” Reguzzoni told Italian television. “We’ve made alternative proposals which we will discuss in cabinet.”

Ministers are due to meet at 1600 GMT.

EU leaders have become increasingly exasperated at the government’s erratic response to the crisis, which could threaten the entire euro zone if Italy does not shore up its finances and regain the confidence of financial markets.

Italian newspapers commented bitterly on the wry smiles exchanged between Merkel and Sarkozy when they were asked about Berlusconi during a news conference Sunday at which they demanded Rome act more quickly.

“It was not nice, for an Italian, to be present yesterday at the news conference in Brussels held jointly by Merkel and Sarkozy,” the daily Corriere della Sera said in an editorial.

Tweaking the pension system presents a formidable challenge for a weakened government that has been riven by internal divisions and distracted by a variety of scandals involving Berlusconi and several other ministers.

Under the current system, the basic pension age for men is 65, a level to which the women’s pension age is being gradually increased. Many Italians however have a form of length-of-service pension which allows them to retire earlier, based on the number of years they have paid contributions.

League leaders have so far resisted major pension reforms, and overcoming their objections will be vital for the 75-year-old prime minister, who depends on the regional party for his narrow but so far stable parliamentary majority.

REFORMS

Italy, the euro zone’s third largest economy, is now firmly at the center of the debt crisis, as alarm has grown at its stagnant economy and the sustainability of its 1.8 trillion euro debt pile.

Berlusconi’s struggling center-right government has announced a succession of reforms and budget balancing measures since August when market pressure forced the European Central Bank to support Italian bonds by intervening in the market.

Despite a commitment to balance the budget by 2013, markets remain skeptical that Italy will return soon to fiscal health. Italian 10-year bond yields are now nearly 6 percent, close to levels reached when the ECB began its bond buying program in August.

With more than 250 billion euros of medium and long-term bonds maturing next year and needing to be refinanced, yields at that level could torpedo efforts to bring Rome’s finances under control.

“Italy may feel victimized but this is what a paralyzed government and too much debt can do,” said Nicholas Spiro, head of Spiro Sovereign Strategy in London.

Economy Minister Giulio Tremonti has promised a package of reforms that would open up closed professions, cut red tape and raise revenue though steps such as privatizations and a new wealth tax, measures all aimed at boosting growth and righting the state’s finances.

The package has been repeatedly delayed by deep differences between ministers over key parts of it.

Berlusconi has faced damning criticism from groups ranging from the center-left opposition and unions to the main employers federation and even the Catholic church. Italy’s head of state, President Giorgio Napolitano, last week expressed “anguish” at the lack of action from the government.

“With a government like this, nothing will ever be enough,” Pierlugi Bersani, leader of the opposition Democratic Party said in a statement in which he proposed a package of measures including a tax on big property holdings as well as measures to liberalize the economy and help youth employment.